Asian stocks rally as China cuts key interest rate…

The People’s Bank of China lowers its key interest rate, triggering an Asian market rally that could boost US equities.

5 minute read

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Key points to remember

  • Asian stocks rally as China lowers key interest rate

  • Major US indices continue to bounce off Thursday lows
  • Top-Down or Bottom-Up, Finding Rough Diamonds Takes Time

Shawn Cruz Director of Derivatives Strategy, TD Ameritrade

(Friday Market Open) Stock index futures point to a higher open as investors hope to take advantage of Thursday afternoon’s rally. the Cboe Market Volatility Index (VIX) fell to 28.6 in premarket action as Asian markets rallied on favorable rate news.

Market potential movers

The People’s Bank of China lowered its key rate on Friday for the second time this year, sparking a rally in Chinese stocks. The Hong Kong Hang Seng increased by 2.96%, while Shanghai the exchange rate rebounded by 1.6% and the BSE Sensex climbed 2.91%. China’s neighbors have also risen to the news with Japan Nikkei gains 1.27% and Singapore up 1.56%.

One of the reasons stocks have struggled to rebound is that many investors are deleveraging and liquidating positions. Rising rates and market uncertainty have made margin trading more expensive. According to FINRA, margin balances fell by about $50 billion between February and April. May figures are expected to be released by Monday, which could reflect further declines. The reduction in margin reflects a reduction in demand for shares.

Additionally, Melvin Capital Management LP plans to shut down its hedge funds and return money to its investors. Melvin had suffered heavy losses over the past 17 months and caught the eye when he tried to short GameStop (GEM). According to Bloomberg, chief investment officer Gabe Plotkin has decided to close the doors. This is another flow of funds in the market.

Investors are analyzing several mixed earnings reports this morning:

  • Deere & Co. (DE) beat both high and low numbers and raised its earnings forecast, but still fell 4.26% in premarket trading. Investors may be focused on declining operating margins.
  • Foot locker (FL) beat on profits despite having no revenue. FL offered guidance at the “upper end” of the range leading to a 2.31% rally before the opening bell.
  • Ross Stores (ROST) missed earnings and revenue after Thursday’s close and plunged 23.19% in extended hours trading.
  • Decker’s (DECK) rose nearly 16% after beating earnings and revenue after yesterday’s close. The company posted record sales of UGG boots and raised its forecast.
  • Applied materials (AMAT) also missed the top and bottom figures after yesterday’s close. The semiconductor maker fell 2.47% in after-hours trading, but pared its losses to 0.59% before the opening bell.
  • Palo Alto Networks (PANW) beat earnings and revenue last night, sending the stock up 10.23% in extended trading hours.

Despite the pre-market bullish trend, the 10-year Treasury yield (TNX) fell 25 basis points ahead of the opening bell, suggesting some investors still want safe havens. Additionally, the US Dollar Index ($DXY) also rose.

Market Minutes Review

After leading stocks lower for the past eight months, the Russell 2000 (RUT) led a rebound on Thursday rallying more than 1%, but gave up most of its gains and closed up just 0.08%. the Nasdaq Compound ($COMP) fell about 1% on the open but rallied 1.3% into positive territory before ending down 0.26%. Likewise, the S&P500 (SPX) and the Dow Jones Industrial Average ($DJI) saw similar upward swings before closing down 0.58% and 0.75% respectively.

Retailers’ performance was mixed despite companies posting weaker earnings forecasts. Kohls (KSS) and The place of children (PLCE) increased by 4.4% and 10.5% respectively. However, Bath and body care (BBWI) fell 6.8%. The culprits who started the sale kept falling with walmart (WMT) lost another 2.8% and Target (TGT) plummeting 5.1%.

Transport tickets continued their descent with the Dow Jones Transportation Index ($DDI) drops another 1.84%. The group was injured by Citigroup (C) demotions of analysts on the railways, including Union Pacific (UNP), CSX (CSX), and South Norfolk (NSC).

However, consumer staples were the worst performing sector, continuing to struggle as inflationary pressures squeezed profit margins. Technology was the second worst sector, dragged down by Cisco (CSCO). CSCO fell 13.7% after missing revenue and lowering its quarterly profit forecast.

CHART OF THE DAY: SWING LINE. The S&P 500 Consumer Staples Index ($SP500#30—candlesticks) recently declined. The retail food and staples index ($SP500 #301010 – pink) posted the largest decline of the industry groups that make up the sector. The beverage index ($SP500#302010—blue) and the food index ($SP500#302020—orange) followed. The Tobacco Index ($ SP500 #302030 – gray) saw a smaller decline. However, the personal products index ($SP500#303020—yellow) appears to be relatively unaffected by the decline. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three things to watch out for

Stapler: One of the problems with sectors is that they tend to be too broad and not all industry groups within a sector react to news in the same way. For example, the Personal Product Index represents the industry group of the same name in the consumer staples sector. It has been trending down for most of the past three months, while the other groups have mostly been up. Now, while the rest of the sector appears to be declining, personal products appear to be showing some strength.

Moreover, the Tobacco index declined with the sector, but on a smaller scale, showing some strength relative to the sector.

Using top-down methods to find potential investment candidates can sometimes require you to remove a few layers of dirt.

Risk activated? the Russell 2000 (RUT) The small cap index is testing its 2018 and 2019 highs, which will likely be a key support level. If the bulls can hold, the price level has the potential to stop the slide and build a base – a sideways trading range where large investors see value and start accumulating stock. When investors begin to accumulate riskier small cap stocks, they are said to be in “risk on” mode.

However, it is debatable whether small cap stocks are a good value. According to a report by Yardeni Research, the Russell 2000 futures price-to-earnings (P/E) ratio is 17.4 as of May 12. In 2020, its forward P/E was around 50, but the credit crisis bear market didn’t find a bottom until the ratio was around 12. Russell 2000 Growth Index (RUO) hit such high 2020 P/Es that the report capped the data at 60. As of May 18, the index ratio was 28.9. the Russell 2000 Value Index (RUJ) peaked around 28 but was at 13 in the report. At the market low in 2008, the RUO and RUJ were also close to 12.

Trend segments: A bull market trend is built on three main phases: accumulation, public participation and distribution. The accumulation phase often begins when a bear market ends with the most sophisticated investors buying while everyone else sells. This type of accumulation is what builds the base patterns and helps start a new bull market.

After the market has risen for a while, other investors also step in. Eventually, the general public will join in, and the trend will continue to grow and expand.

The distribution phase begins as the bull market turns into irrational exuberance. When everyone is greedy, the most sophisticated investors sell in the rallies. Eventually, stocks begin to fall when the number of sellers exceeds the number of buyers and the price must fall to find new buyers.

While some investors may see small caps as a good investment at these valuations, it’s hard to say whether it’s the sophisticated investors who can build a foundation.

Notable Calendar Items

May 23: Earnings from Advance Auto Parts (AAP)

May 24: New Home Sales and Earnings of Intuit (INTU), Best Buy (BBY), Ralph Lauren (RL), Toll Brothers (TOL) and Nordstrom (JWN)

May 25: Durable Goods, FOMC Meeting Minutes and Revenues from NVIDIA (NVDA), Splunk (SPLK), Williams-Sonoma (WSM) and Dick’s Sporting Goods (DKS)

May 26: Gross domestic product, pending home sales and revenue from Medtronic (MDT), Dollar General (DG), Snowflake (SNOW) and Workday (WDAY)

May 27: PCE price index and earnings of Dell Tech (DELL), Domo (DOMO) and Hibbett Sports (HIBB)

good trade,

Shawn Cruz

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